organisation types

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Types of Business

Organisation

GCSE Business StudiesGCSE Business Studies

tutor2ututor2u™™ Revision Presentations 2004Revision Presentations 2004



tutor2ututor2u™™ GCSE Business StudiesGCSE Business Studies

Introduction

A business is always owned by someone. This can just be

one person, or thousands. So a business can have a number

of different types of ownership depending on the aims and

objectives of the owners.

Most businesses aim to make profit for their owners. Profits

may not be the major objective, but in order to survive a

business will need make a profit in the long term.

Some organisations however will be ‘not-for-profit’, such as

charities or government-run corporations.




Key Learning Points

What are the different types of business organisation?

What are the advantages and disadvantages of each type?

What are the implications of the choice of businessorganisation on key issues such as:

Ability to raise finance

Control of the business

Business aims and objectives


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Main types of business organisation

Sole trader

Partnership

Private Limited Company (“Ltd”)

Public Limited Company (“plc”)

Co-operatives

Franchises

Public sector


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Measuring size of a business

No one measure of the size of the business

Options

Number of employees

Number of outlets (e.g. shops)

Total revenues (or “sales” per year)

Profit

Capital employed – amount invested in business

Market value

Often need to consider several measures together

Business size is “relative” – e.g. how large is a business

compared with its main competitors?




Sole Traders

A sole trader is a business that is owned by one person

It may have one or more employees

The most common form of ownership in the UK

Often succeed – why?

Can offer specialist services to customers

Can be sensitive to the needs of customers – since they are closer to thecustomer and react more quickly

Can cater for the needs of local people – a small business in a local area

can build up a following in the community due to trust

Key legal points Keep proper business accounts and records for the Inland Revenue

(who collect the tax on profits) and if necessary VAT accounts

Comply with legal requirements that concern protection of the

customer (e.g. Sale of Goods Act)




Operating as a sole trader

ADVANTAGES

Total control of business by owner

Cheap to start up

Keep all profit

DISADVANTAGES

Unlimited liability

Difficult to raise finance

May be difficult to specialise or enjoy economies of scale

Problem with continuity if sole trader retires or dies




Unlimited liability

An important concept – it adds to the risks faced by the sole

trader

Business owner responsible for all debts of businessMay have to sell own possessions to pay creditors




Sole trader forming a partnership

Spreads risk across more people

Partner may bring money and resources to business

E.g. better premises to work from

Partner may bring other skills and ideas to business

Increased credibility with potential customers and suppliers –

who may see dealing with business as less risky




Partnership

Business where there are two or more owners of the

enterprise

Most partnerships have between two and twenty membersthough there are examples like the major accountancy firms

where there are hundreds of partners

A partner is normally set up using a Deed of Partnership.

This contains:

Amount of capital each partner should provide

How profits or losses should be divided

How many votes each partner has (usually based on proportionof capital provided)

Rules on how take on new partners

How the partnership is brought to an end, or how a partnerleaves




Advantages of Partnership

Spreads the risk across more people, so if the business gets

into difficulty then the are more people to share the burden of

debt

Partner may bring money and resources to the business

Partner may bring other skills and ideas to the business,

complementing the work already done by the original partner

Increased credibility with potential customers and suppliers –

who may see dealing with the business as less risky than

trading with just a sole trader




Disadvantages of a partnership

Have to share profits

Less control of business for individual

Disputes over workload

Problems if partners disagree over of direction of business




Limited company

Business owned by shareholders

Run by directors (who may also be shareholders

Liability is limited (important)




Setting up a limited company

Company has to register with Companies House

Issued with a Certificate of Incorporation

Memorandum of Association - describes what companyhas been formed to do

Articles of Association - internal rules covering:

What directors can do

Voting rights of shareholders




Controls of a company

Shareholders own company

Company employs directors to control management of

businessThe directors may also be shareholders (most are)

Directors are responsible to shareholders

Have a duty to act in best interests of shareholders

Have to account for their decisions and performance (Accounts)




Importance of limited liability

Limited liability means that investors can only lose money

they have invested

Encourages people to finance companyThose who have a claim against company:

Limited liability means that they can only recover money from

existing assets of business

They cannot claim personal assets of shareholders to recover

amounts owed by company




Separate ownership and management

of a company

Shareholders may have money

May not time or management skills to run company

Day to day running of business is entrusted to directors

Directors employed for their skills & experience




Differences between a private and

public limited company

Shares in a plc can be traded on Stock Exchange and can be

bought by members of general public

Shares in a private limited company are not available togeneral public

Issued share capital (initial value of shares put on sale) must

be greater than £50,000 in a plc

A private limited company may have a smaller (or larger)

capital.

R f i li i d




Reasons for a private limited

company to become a “ plc”

Shares in a private company cannot be offered for sale to

general public

Restricts availability of finance, especially if business wants toexpand

It is also easier to raise money through other sources of

finance e.g. from banks.

Note: becoming a “plc” does not necessarily mean that

company is quoted on Stock Exchange

To do that, company must do a “flotation”




Disadvantages of being a plc

Costly and complicated to set up as a plc

Certain financial information must be made available for

everyone, competitors and customers includedShareholders in public companies expect a steady stream of

income from dividends

Increased threat of takeover




Buying shares in a company

Shares normally pay dividends (share of profits)

Companies on Stock Exchange usually pay dividends twice

each year Over time value of share may increase and so can be sold for

a profit (known as a “capital gain”)

Of course, price of shares can go down as well as up, soinvesting in shares is risky.

If they have enough shares they can influence management

of company

Good example is a “venture capitalist”

Will often buy up to 80% of shares of a company and insist on

choosing some of directors

Risks faced b compan




Risks faced by company

shareholders

Company reduces its dividend or pays no dividend

Value of share falls below price shareholder paid

Company fails and investor loses money invested




Main forms of co-operative

Three main types of co-operative

Retail co-ops

Marketing or trader co-ops Workers co-ops

Examples:

Co-operative Retail Society Farmer’s co-operatives marketing and distributing food products

Small business credit unions

Artists’ co-operatives sharing studio and exhibition facilities




Examples of franchises in the UK

McDonalds

Clarks Shoes

Pizza Hut

Holiday Inn




Franchises

The franchisor is the business whose sells the right to

another business (franchisee) to operate a franchise

Franchisor may run a number of their own businesses, but also

may want to let others run the business in other parts of the

country

A franchise is bought by the franchisee

Franchisee required to invest – often around £10,000 - £50,000in acquiring the franchise licence and setting up the business

Once they have purchased the franchise they have to pay a

proportion of their profits to the franchisor on a regular basis

Depending on the business involved, the franchiser may provide

training, management expertise and national marketing

campaigns

May also supply the raw materials and equipment.

Advantages and disadvantages of




Advantages and disadvantages of

franchising

Advantages

Tried and tested market place, so should have a customer base

Easier to raise money from bank to buy a franchise Given right and appropriate equipment to do job well

Normally receive training

National advertising paid for by franchisor

Tried and tested business model

Disadvantages

Cost to buy franchise

Have to pay a percentage of your revenue to business you have

bought franchisor

Have to follow franchise model, so less flexible

Reasons why franchising has




Reasons why franchising has

become more popular

Large companies have seen it as a means of rapid expansion

Franchisee provides most of finance – reduces investment in

expansionLocal entrepreneur with inherited or redundancy money sees

opportunity to set up business with reduced risk

Banks like combination of large company and small localbusiness as a reduced lending risk.

Reasons for public sector




Reasons for public sector

organisations

Provide essential services not fully provided by private sector

Prevent exploitation of customers

Avoid duplication of resources

Protect jobs and maintain key industries

Reasons for privatisation of public




Reasons for privatisation of public

organisations in UK

State run firms perceived to be inefficient

No incentive to cut costs or provide high quality services

because there is no competitionState-run firms can be a financial burden on government

Selling them off raises valuable money for government




Disadvantages of privatisation

Private companies may put prices up

Cut jobs and reduce services that are not profitable

Disadvantages the needy

organisation types

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